Impact of the US Tariff on India

Impact of the US Tariff on India
India has become an important player in international trade since its integration with the global economy following liberalisation in the 1990s. According to World Bank data, India's trade-to-GDP ratio was 45% and its exports-to-GDP ratio was 21.2% in 2024. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. The USA has announced to impose 50% tariffs on Indian exports to the USA, which is a setback for the Indian economy.

Tariffs are in the alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. However, according to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs, lowering welfare. So tariffs imposed by any country can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of tariffs depends upon the extent, targeting, and tenure.

Economic Impacts

India's trade profile exposes it to counter-tariffs. India's export (goods and services) in 2024 was $828 billion, with major markets being the United States, the European Union, and China. When a trading nation such as the U.S. introduces a 10% duty on Indian textiles, India can respond by imposing similar duties on the U.S. agricultural produce or technology imports. However, India has not resorted to retaliatory tactics like China and the EU. Trade wars have ripple effects. As a result of the 2018 US-China trade war, India experienced a 5% decline in steel exports to America as a result of diverted Chinese supply, while India responded with retaliatory tariffs on American almonds and walnuts.

In the short term, any country can shield its domestic producers through tariffs. But in the long term, the benefits vanish with an increase in input costs for imported components and increased prices for the domestic consumers. Dixon Technologies is a classic example of this. India increased tariffs on Chinese electronics, which led to an increase in revenues of Dixon Technologies by 25% but the prices of smartphones increased by 8-10%. Not only this, but such tariffs lead to inflated costs across supply chains, which eventually undermine the competitiveness of price-sensitive export markets.
 

Industrial Implications

India has a diverse industrial landscape with a lot of labour-intensive sectors, like textiles, on one hand and capital-intensive sectors like pharmaceuticals on the other hand. The tariffs by the US will affect different industries disproportionately. The sectors (pharmaceuticals and textiles) which are heavily export-oriented will feel the brunt of high tariffs by the USA, and those sectors (pharmaceuticals and automobiles) which use imported intermediate products will feel the heat if India increases tariffs on imports. The automotive sector, contributing about 7% to India's GDP, imports about 30% of its components.

On the other hand, tariffs can trigger domestic substitution. India's "Make in India" policy reflects this reasoning, as has been observed in the solar panel sector. Following the imposition of 25% tariffs on Chinese panels in 2022, local production increased by 15%. However, quality as well as size of production in India continues to be an issue as the Indian solar panels are 10-15% more expensive than imports; however, this is transitory and prices would go down with economies of scale. Retaliatory tariffs can trigger self-reliance, but they need to be accompanied by complementing investments in technology and infrastructure.
 

Geopolitical Dimensions

Tariffs are not merely economic tools but also geopolitical levers. India's trade policies reflect its strategic balancing between Western powers and regional rivals like China. The 2020 Galwan clash prompted India to impose tariffs on Chinese goods, signalling economic decoupling. As a result, by 2023, the share of China in Indian imports fell from 14% to 11%. But India had to pay a price for this, with India importing from costlier alternatives like the EU and Japan.

India is party to many multilateral negotiations, like the Quad and RCEP. This fact complicates its tariff strategy as some of the participants are not just commercial but have security angles. Tariffs against a partner jeopardise security alliances. Tariff choices, therefore, get inextricably linked to longer-term foreign policy objectives and have to be sensitively calibrated.
 

Long-Term Considerations

Tariff sustainability relies on the capacity of India to absorb shocks. With aabout 1% of GDP current account deficit, sustained tariff wars can worsen foreign exchange pressures in the short term. With the current stance of the US, India has no choice other than searching for other trading partners across the globe while negotiating with the US for a balanced trade deal. However, this can prove to be an opportunity for India as it would focus more on the less developed markets in Africa and Latin as well as Asia, where the future lies. Also, India has a free hand as the WTO cannot interfere like earlier. WTO norms restrict retaliatory tariffs, but the relevance of WTO is in question post the USA imposing unilateral tariffs, announcing the untimely demise of WTO.
 

Conclusion

Mutual tariffs pose a double-edged sword to India. They provide short-term protection for the local industries and geopolitical clout at the cost of export growth, industrial efficiency, and world trade relationships. For India to make its way through this maze, a sophisticated strategy blending calibrated tariffs with structural reforms appears to be necessary. While international trade tensions continue, India's tariff policy should move in such a direction that it turns India into a manufacturing hub for the world, defining its economic path for the next several decades. It must be noted that India’s export to the US is just 2% of India’s GDP. So as a whole, the tariffs by the US would upset the trade balance for India in the short term, but cannot jeopardise its economic growth, which has been endorsed by the S&P's recent sovereign rating upgrade from BBB- to BBB with a stable economic outlook. So India has the convenience to play its ball on its terms against the US hegemony.
 
Rajeev K Upadhyay

No comments:

Post a Comment